HOUSTON — Eons before the first wildcatters smelled oil in West Texas, massive slabs of eroded sediment had fused and folded into thick bands underground, trapping the primordial sludge in layers of earth too deep to reach until modern-day engineers discovered a way.
The technological breakthroughs of the past half-decade have made the plains near Odessa and Midland — long considered past their prime — some of the most coveted land in the nation. Pioneer Natural Resources, an Irving, Texas-based independent producer that has been active in the region for decades, estimates that two key Permian Basin plays hold 75 billion barrels of oil in stacked stone wedges.
“We have six Bakkens sitting on top of each other,” Pioneer CEO Scott Sheffield said recently, referring to North Dakota’s prolific Bakken Shale.
But the same North American oil patches that have lifted Pioneer and other independent oil producers to an unprecedented status in the energy industry haven’t come up gushers for major integrated oil companies like Royal Dutch Shell and BP. While big companies dominate the deep waters of the Gulf of Mexico and frontiers overseas, their smaller counterparts have claimed the most lucrative territory in the Bakken, the Permian and the Eagle Ford Shale in South Texas.
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Throughout the 1980s and 1990s, Pioneer amassed hundreds of thousands of acres in West Texas. Only in recent years, however, have producers begun to corral wells closer together, sometimes as close as 350 feet, to tap into the separate layers of oil. Pioneer alone is pumping from 7,000 wells.
After research last year, including 3-D seismic scanning and a small program to fracture the elusive formations called “stacked intervals,” Pioneer plans to spend more than $2.3 billion on horizontal drilling in two key fields this year, an early part of an effort to boost its rig count from 24 horizontal rigs to more than 50 there in 2018. It will be more expensive than drilling vertically, but the economics make sense, Sheffield said.
“At four times the cost, we’re getting 20 times the production rate,” he said.
Pioneer bought out acreage and wells from Mobil Oil Corp. (now part of Exxon Mobil Corp.) and other majors.
Now those giants, which have extended their mighty reach into the world’s most remote and challenging energy environments, struggle to maintain their footing as players in the U.S. energy revolution.
In terms of acreage in the three biggest shale-oil plays, small players outweigh the majors 5-to-1, according to a FuelFix analysis of data compiled by Bloomberg.
“The independents jumped all over this right from the get-go; they got better acreage,” said Kenneth Medlock, senior director of Rice University’s Center for Energy Studies.
In the same West Texas plains, Royal Dutch Shell is clinging to what it calls its best results yet in the North American shale: Thirty of its wells flow 1,000 barrels per day in the Permian. But after losing $900 million on its North and South American upstream business last year, the company announced last month it plans to cut spending on it by 20 percent this year and sell off its stake in the Eagle Ford Shale and other liquids-rich zones.
“Drilling results there were mixed, and this acreage does not have enough materiality for a company of our size,” Shell Oil Co. President Marvin Odum said in an investor presentation March 13. “We are talking to several potential buyers for those assets.”
Shell Oil Co. is the Houston-based U.S. arm of Royal Dutch Shell.
The same month, BP announced a plan to split its U.S. onshore oil and gas segment into a separate business by next year, reasoning that a more focused, nimble unit will be able to take on the smaller companies. A new management team will oversee its 7.6 billion barrels of oil and gas resources in the Eagle Ford and elsewhere.
Two years ago, BP wrote down $1.1 billion on its shale gas assets because the value of their reserves dropped along with as natural gas prices. And from 2011 to 2013, BP’s net share of production in the U.S. fell 15 percent.
Exxon Mobil’s 7 percent return on capital for its U.S. upstream business last year was dwarfed by the 24 percent return it collected on its international energy production business, according to regulatory documents.
This raises questions about how long the integrated oil companies, which have much more at stake in expensive deep-water projects across the globe, will remain a part of the U.S. energy surge. If Big Oil abandons its shale ambitions, however, the fragile economics of the new oil boom may rise to the surface.
Many analysts believe slowing growth in emerging economies and other factors may drive oil prices down. The U.S. Energy Department projected last week that benchmark U.S. crude will average $95.60 per barrel this year and $89.75 in 2015.
“People are ignoring the major downside for exploration and production companies,” said Stewart Glickman, an analyst with S&P Capital. Falling crude prices could send investors to major oil stocks in search of higher dividends.
In recent years, the success of U.S. independent oil companies in the shale drew the larger players, which thought they could use their financial heft to deal with the uncertainty and high development costs, said Michelle Foss, chief energy economist for the Bureau of Economic Geology’s Center for Energy Economics at the University of Texas.
“But it’s much easier for bigger, more expensive companies to play in a game where wells produce 3,000 barrels per day, not 300,” Foss said. “Returns on a good deep-water Gulf of Mexico project with wells that flow, say, 3,000 barrels per day are as good as, if not better, than onshore projects that flow 300 barrels per day. Chances are, those Gulf of Mexico wells have bigger flows and flatter decline curves.”
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Larger companies aren’t all thumbs in the shale. BHP Billiton, which snapped up the Eagle Ford producer Petrohawk Energy in 2011, saw its shale liquids output grow 75 percent last year. Like BP’s new initiative, the Australian mining giant has run a separate U.S. shale business from Houston since last year.
“You’ve got to have a relentless focus on productivity in shale,” said Rod Skaufel, president of BHP Billiton’s North American shale business.
Two former majors, Houston-based Marathon Oil Corp. and ConocoPhillips, split off their refining operations into new companies and have expanded their oil production in North American shale plays.
ConocoPhillips says it plans to spend $3 billion in the Eagle Ford and $3 billion in the Bakken over the next three years. Like Pioneer, it bunched wells close together and hiked its tight-oil proven reserves by 700,000 barrels per day last year.
In 2011, Marathon paid $3.5 billion to buy 141,000 net acres in the Eagle Ford, where it plans to send the largest chunk of its $3.6 billion in 2014 North American oil field investment.
Much of the independent operators’ advantage stems from the oil majors’ decision to divest from mature North America fields in the 1980s and turn toward the frontier — deep water, heavy oil and Arctic drilling. They sought larger reserves to replace their falling stockpiles, said Lysel Brinker, a director with IHS Energy equity research.
Following the leaders
With smaller positions in the U.S., Brinker said, the majors were not equipped to expand rapidly across the shale plays, as the smaller operators did. Instead, they followed behind and paid higher land prices for acreage rich in shale gas, now abundant and cheap.
Brian Youngberg, an analyst at Edward Jones, said the majors will have to keep restructuring their shale businesses to become more nimble, but if investors don’t see positive results soon, they may begin to demand spinoffs and asset sales.
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Matthew Steele, president and CEO of Houston-based Ursa Resources Group, said without the ability to make nimble turns, his company could not have put together speedy mineral rights and acreage deals.
“I can move 50 land men into a courthouse in a day,” Steele said. In 2010, Ursa Resources assembled 50,000 acres in the Bakken in just three months and another 50,000 later that year.
Steele, who worked for Shell earlier in his career, said any drilling or land acquisition decision must go through several hoops at a major oil company, and it may take months.
Pioneer’s Sheffield estimates the company’s Permian fields will produce 2.5 million barrels of oil in 2033, up from 1.1 million barrels this year.
But horizontal drilling rigs, which make up 38 percent of the units in the Permian, still have a ways to go in West Texas, as operators are just learning to pack wells close together, to match with the underground stacks of earth that hold billions of barrels of oil, said Mike Oestmann, CEO of Tall City Exploration.
“We’re just in the infancy,” Oestmann said.
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